Pension deficit up, profit down, but cost-cutting is bearing fruit, as BT's interim results attest.
Do you ever look back on one of your previous utterances and think "Hmm, I kinda wish I hadn't said that"? Early last month, in my bullish contribution to a Duelling Fools debate on BT Group (LSE: BT-A), I opined that "all the bad news regarding its debt and pension fund are out in the open, and very likely getting better".
Oh dear. In Thursday's interim results announcement, BT told us that the value of its pension fund deficit, re-evaluated under new UK accounting rules, has now more than doubled over the last six months, from £4bn to £9.3bn. However, it wasn't actually as big a surprise as headlines might make it look -- as I pointed out after BT's first quarter results announcement back in July, the reworked figure already stood at £8bn then, and might end up even higher. But the extra £1.3bn still isn't small change.
The other apparently bad news in the headlines is that pre-tax profits for the half year almost halved, down to £547m from £991m for the first half last year. However, that does include the changes in the pension fund accounting, and the exceptional costs of the redundancies that have been made in the course of the six months.
Cost-cutting bearing fruit
So, while revenues were slightly down on last year, by just 1% to £10.4bn, once the pension fund effect and the cost of redundancies are extracted, underlying pre-tax profit actually rose 12% to £888m, suggesting that BT's drive to cut underlying costs is proving successful. And that aggressive policy is set to continue, as the company raised its cost-cutting target for the end of the year by a further £500m, buoyed by its having exceeded its aims so far -- around £900m in savings has been made in just the first half.
The intention to dispense with the services of 15,000 employees worldwide is still on course for the end of the year, and there are plans for a reduction of a further 15,000 in the next financial year.
On the back of all this impressive cost-cutting, Chief Executive Ian Livingstone was able to tell us that he now expects free cash flow of £1.6bn this year,which would be a more than adequate achievement of the company's target of more than £1bn.
Global Services improve
Other headline figures include total revenues of £5.1bn, which is down 3% (or 6% excluding foreign exchange movements and acquisitions). And one very important measure, profits from the beleaguered BT Global Services, continues to improve, with adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) up 53% on the first quarter, at £95m.
A very important figure in many investors' minds, net debt, has been reduced to £9.9bn -- that might only be a relatively small fall, but it's very much heading in the right direction, and the full effects of all that cost-cutting on the debt figure probably won't really feed through for perhaps another year or so.
Prospects
BT believes its future prospects are improving, with a fall in revenues for the full year of only 3-4% now expected, which is better than its previous suggestion of a drop of 4-5%. Investors did seem to share in the optimism -- the shares were up 8% on the day, to 150p, at the time of writing.
So what do I think? Despite my initial shock at the level of the latest pension fund deficit revaluation (and the revaluating must stop some time short of the next regulatory exercise due in 2011, when I expect the numbers to have started heading downwards), I do still think I was right back in that Duelling Fools article, and I'm convinced that BT is following the best possible course of action to get itself back on track for long term stable business.
It might take a few more years yet, but Foolish investors are not hasty folk.
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